Incident: Revenue of $13.46 billion (+9.5% YoY), net profit to mother of $180 million (YoY -68.9%); of which 23H2 revenue/net profit to mother of $68.2/-40 million (23H2 revenue +2.4% YoY, profit changed from profit to loss, 22H2 net profit of 50 million yuan).

The decline in raw milk prices is lower than that of the industry. Milk prices are expected to stop falling and rebound in 3Q24-1Q25.

In '23, the company's raw milk business revenue was 10.26 billion yuan, +3.2% year-on-year, with raw milk sales +9.4% to 2.55 million tons, and milk prices -5.6% to 4.03 yuan/kg. However, the decline in the company's milk prices was far lower than the decline in raw milk prices in the market, benefiting from deep and stable partnerships with customers. In terms of volume and price breakdown, the company's production can be expected to continue to grow steadily. In 23 years, 451,000 heads were kept, +11.2% year over year, and 219,000 adult dairy cows were kept, +9.5% year over year. The average annual yield of the company's adult dairy cows reached 12.6 tons/head in '23, +3.3% over the same period. The yield efficiency continues to improve. It is expected that the company's raw milk sales will maintain high single to double digit growth in the future. Gross margin/net profit margin for 23 years was 23.2%/1.3%, -3.4pct/-3.3pct year-on-year. The company's performance is closely related to the raw milk price fluctuation cycle. Milk price is an important factor. We are not pessimistic about future raw milk prices. Currently, factors such as the withdrawal of small and medium-sized ranches, the narrowing of domestic and foreign price differences, and feed still being high all form the bottom support for raw milk prices. At the same time, considering the duration of the raw milk cycle, we expect milk prices to stop falling and rebounding between 3Q24-1Q25.

Cost control capabilities are still excellent, and the cost of milk feed per kilogram has continued to decline for 24 years. The unit cost per kilogram of milk in '23 was 2.92 yuan, -1.7% year-on-year, and the performance was superior to the industry. Among them, the cost of a kilogram of milk feed was 2.34 yuan, +0.4% year-on-year, and other costs were 0.58 yuan/kg, -9.4% year-on-year. (1) The month-on-quarter decline in feed costs: 22H1/22H2/23H1/23H2 is 2.26/2.40/2.39/2.29 yuan respectively. The cost of 23H2 kg of milk feed has declined markedly from the high point of 22H2, and the price lock situation of integrated companies has completed 65% of procurement in 24 years, and will continue to maintain a month-on-month downward trend in 24 years. We expect feed costs to be around 2.05 yuan/kg in 24, a year-on-year decline of about 12%. (2) Other costs declined sharply year-on-year, mainly due to the company's subjective activism, continuous optimization of process management, and controllable costs such as equipment/personnel. Benefiting from the continuing decline in costs, we expect the gross margin of the raw milk business to be higher in 24 years than in 23.

New business models are gradually being established, and revenue growth can be expected. In '23, the new business segment recorded revenue of $3.20 billion, +35.9% over the same period last year. The new business includes the original feed business, as well as the new digital intelligence platform business. Liangyuan Technology, the love of raising cows, the modern pasture industry, modern feed, and the Mengyuan breeding industry are all developing rapidly. The company continues to empower business partners with industry-leading supply chain advantages. With the development of new businesses, it can not only bring incremental revenue, but more importantly, promote large-scale procurement in the raw milk industry, further centralize procurement, reduce costs and increase efficiency.

Profit forecast and investment advice: Based on the current decline in raw milk prices exceeding expectations, and the milk price cycle is rising later than expected, we reduced the profit forecast. The company's revenue for 2024-2026 is estimated to be 151.8/168.1/18.42 billion yuan (previous value 160.4/17.71 billion yuan), respectively; net profit to mother is 4.5/8.0/1.07 billion yuan (previous value: 11.00/1.64 billion yuan). EPS is expected to be 0.06/0.10/0.14 yuan (previous value 0.14 billion yuan), respectively /0.17/NA yuan). Taking into account comparable company valuations, Hyundai Animal Husbandry was given 9xPE in 2025 (previous value: 9xPE in 2024), a target price of HK$1 (1HKD=0.9236CNY, previous target price of HK$1.33, down 25%), and maintained a “superior to market” rating.

Risk warning: commodity prices are rising, and the recovery in downstream demand falls short of expectations.